UKGI00042805
UKGI00042805
ae
UK Government
Investments
Post Office Ltd
Portfolio Summary
29 June 2018
OFFICIAL — SENSITIVE
UKGI00042805
UKGI00042805
OFFICIAL - SENSITIVE DRAFT
Asset Summary
Asset's strategic Post Office Ltd (POL) operates and maintains the network of post office branches across the UK. It
objectives is obliged (through legal funding agreements) to maintain a minimum network of branches that meet
HMG's access (proximity) criteria. It receives subsidy of £50m per annum and it has also been
awarded up to £210m of investment funding (between 18/19 and 19/20). POL aims to achieve full
financial sustainability without need for further HMG subsidy from the early 2020s.
Key risks / contextual - Long run decline in some core products (mails and govemment services) means that improved
factors which may performance relies on continued cost reductions and expansion of financial services
pact strategic POL is implementing large scale upgrades to core infrastructure, particularly IT
objectives Renegotiating core third party contracts (in particular with Royal Mail and Bank of Ireland)
POLis unable to access external finance, which could limit its room for manouevre
Successfully defending against class action from some subpostmasters
What levers does UKGI POL is @ public corporation, with an independent fiduciary Board. BEIS is the sole shareholder and
have? UKGI is responsible for the day to day management of BEIS's shareholding. UKGI has a NED seat
on the POL Board (now held by Tom Cooper). UKGI monitors the financial and network performance
of POL and approves the release of investment funding on a quatterly basis. It also approves Board
appointments and remuneration for the CEO and CFOO.
What are UKGI’s + Assist POL in delivering its strategic objectives by providing constructive/ challenging input at
overarching Board level as a shareholder representative
objectives? + Ensure POL accords with network commitments
Monitor POL's financial performance and investment pipeline and approve release of allocated
investment funding by BEIS over the period 2018/19 to 2019/20.
Ensure HMG best-practice corporate finance/ governance principles are applied and adhered to
To faciitate the transfer of certain activities to BEIS
Timeframe + Ongoing
UKGI resource and + 1 Director (30% time allocation), 1 Exec Director (50%),1 AD (50%), 1 Manager (50%) and 1 HEO
skills required (80%).
I Investments
UKG100042805
UKGI00042805
OFFICIAL - SENSITIVE
UKGI Quarterly Priorities (1)
DRAFT
Q1 (April - June) Q1 Progress Report I Q2 (July - Sept) a2
Progress
Report
+ Generally the above rely on the team working
pony with POL, BEIS, and HMT, faciitated by our
achieved! ‘seat on the Board.
monitored Spectfically:
2 ‘Work closely with UKGI and BEIS legal teams
‘on developing legal protocol
Meeting with Perm Sec and BEIS officials to
‘agree transfer of policy role
‘Work with POL and advisers Fenchurch on Bol
‘and use Board sub-ctte to finalise Payzone
‘Quarterly network meetings
Above all rely on strong
relationships with POL that
‘allow good communication and
‘constructive challenge
Brief Perm Sec and minister on
it
Invest time in developing
relationship with BEIS policy
team and achieving clarity of
roles
Reviewing Board papers to
prepare NED for meetings
UKGI00042805
UKG100042805
OFFICIAL - SENSITIVE DRAFT
UKGI Quarterly Priorities (2)
Q1 (April - June) Q1 Progress
Report
Company POL can be protective about sharing information e9 aad ° REESE
culture! + Project monitoring and financial performance
People + Litigation case TeoraTAnave Peareto-am
considerat! ~~ New Board member Tom Cooper and new ED Tom Aldred, metal Board Cotati
ons will need to build relationships with the company ae agreement as invasive
‘and overty legalistic.
+ Board may be over-
ambitious for the
of the
business (leading to
lack of focus)
UKGI00042805
UKG100042805
Traffic Light Analysis
OFFICIAL - SENSITIVE DRAFT
Pa aia
Company Retatonstiv() @ @ @
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‘+ The relationship with POL's generally open and fairly collaborative but with room for
improvement. POL can perceive UKGI team as asking for ‘too much’ information
‘+ Although there is no formal governance or shareholder relationship letter with POL,
there is a clearly defined governance relationship set out n POL's articles and a
contractual funding agreement that sets out key elements of the shareholder
relationship (e.g. access to information). There is also an entrustment letter in place.
Currently developing a framework agreement.
‘There are formal financial meetings held every month (and quarterly shareholder
‘meetings) tailored to UKGI's needs, and quarterly reports on investment performance.
Access to senior management and others relevant members also good
‘UKG! administers a complex working capital facility which we would like to transfer
Board and exec team are generally of good quality. Extension of Chair's term to
December 2022 has been approved. CEO despite some identified weaknesses works
well with the Chair.
‘= There has been some chur at the executive level - recently the Chief Executive of the
Financial Service and Telecoms business segment has left and a new Retail Chief
Executive has joined. Whilst both are stil bedding in, we consider that there is a
continuing trend of strengthening the team under the CEO and CFO.
‘There has been no recent Board Effectiveness Review; chair known to be sceptical
UKGI currently undertakes both policy and shareholder functions, and POL has
suffered from a lack of policy sponsorship in BEIS.
BBEIS have agreed in principle to take over policy function. This should include taking
‘over some time-consuming aspects including correspondence and daily management
of a short term loan facility.
‘Meeting with BEIS team in July to flesh out detail and timing.
UKGI00042805
UKG100042805
Traffic Light Analysis
OFFICIAL - SENSITIVE DRAFT
Pascoe] coon eommere
Financial Performance (“F")
alance Sheet & Risk (
POL's financial performance is much improved over the last five years. It achieved its first
"oft In 16 years of €13min FY 16/17 and ison tack to achleve an operating profit of
‘approximately £36m before subsidies in FY 17/18 (ahead of £28m target). The three year
strategy targets £85m by 20/21, so that it will not require ongoing HMG subsidy and
Investment funding.
Better performance has partly been driven by significant cost reductions, although there
is scope to do more. New technology provides capability for POL to considerably improve
its Management Information.
UKGI will be providing close scrutiny and monitoring of POL's performance in delivering
‘against this objective.
UKG1 also monitors the performance of POL's investments and approves the release of
Investment funding tranches on a quarterly basis, with a maximum of £210m available in
investment funding over the period 18/19 and 19/20.
‘The Company has an adequate capital structure - £370m funding agreed to be provided
by BEIS over the 3 year period to 2021, State Aid Approval obtained, £950m loan facility
‘extended to March 2021. Treasury approval obtained for a £50m facility for emergency
intra-day cash needs for the POL network. UKGI currently working through how this will
be operated by BEIS.
There is an ongoing litigation being undertaken against Post Office Limited in relation to
historic claims about the Horizon IT system. If successful, the quantum of the claims
‘could be substantial. Itis worth noting that POL's auditors EY have agreed POL's
‘accounting treatment of this, which is not to create a provision given the lack of claim
details to date.
POL Is considering the buy out of a JV with Bank of Ireland. At over £250m, this would
require additional capital funding
UK Government
Investments
UKGI00042805
UKGI00042805
OFFICIAL - SENSITIVE
Current Entry in UKGI Dashboard
DRAFT
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OFFICIAL - SENSITIVE
Appendices
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‘SECTION A: POL’s CURRENT SITUATION
BENEFITS DELIVERED BY HMG FUNDING SiNcE 2011/12
sam 02
oxy 278)
AU/2h 113k G9/14A 24/1SA15/N6A 167A A7/ABA aya APSA AH/AMA 14S aH/LOA WATA AI/UA 13/124 L2/LBA_4/MKA14/ISA_ 5/8 W/R7A 7/38
‘Loss In Tue Crown Network EuminareD
(ea EOTDAS)
LU/RA BABA A/G 14/15 15/16A 16/378
en
‘STRONG PROGRESS IN NETWORK TRANSFORMATION
(ue oF Bannon Mooemsaro%s)
Modernisation hes added
-milton mer opening hours
{othe netvor por month
‘endmor thon 8,0
broncher re oso now open
onsundoys
so7
aa
A/a 12/13 13/164
14/ISA15/16R 16/17 a7/A8F
‘STATIC FOR FIRST TIME I DECADES (# ORAS)
25,000
20,000
15,000
10.000
5,000
°
veri branch numbers aerets network
‘stble post 2010, flowing 2 osore
mes 2003 05 ond 2007-09
11979 1983 1987 1991 1995 1999 2003 2007 2011 2015
UKGI00042805
UKG100042805
Eg
UK Government
SECTION A: POL’s CURRENT SITUATION '
CHALLENGES FACING THE Post OFFICE NETWORK
7 il payment ond sme
‘goverment serces
28,200
bon focused porcls networks
1,600
I I Fie 4300 2.500 2.500 1000
06/074 08/09 10/11A 12/3A14/35A 26/178 gEE2h 22225888288
20008 70 Volt ofse gotem 15 years cland PO's
trast sfc oe apport Ft
dou ffee veges we teeing pecong
eabity ef rnc wsere cononen
2016/17A Value yong
£a37m revenue 635m FX profit i
whore
OU's 2012 contact wth POL plans to renegotiate its
AM did not envisage how elaonship wt Bo o agree Replacement printers are no longer avaiable,
Intorand arenes sawed stacy for svigs QQ) eva ning estate mt cane
woud develop (or RM's aad lending, to get freedom for seaes to keep branches functioning
tesponse). An opportunity t0 work with other provider: POL relies on dedicated datacentres which ae
now exits to reset key for certain products and to QB) more cost, es existe and ess secure than the
pects ofthe relatonship get better share of profit breif mora eaueeded
foreign exchange products
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UKGI00042805
UKG100042805
SECTION A: POL’s CURRENT SITUATION
SUMMARY OF OPPORTUNITIES TO PROTECT, DIVERSIFY AND GROW POU's BUSINESS
Replacement of branch hardware and networks
' Investment in new and flexible systems to enable
‘mails and financial services product integration, and
Interfaces aligned to target customer groups
* Investment in customer data capture and
‘management to support income growth initiatives
* Simplification of counter systems / processes and
‘branch administration to make Post Offices simpler
and more attractive to operate ~to increase
subpostmasters! margins and reduce subsidy support
‘2eross network
* Development of selected new products (e.g. entity
/ mails products to drive footfall and income}
* Investment in Mails operations to strengthen POL's
+ Renogotiation of existing unfavourable contract with
Bank of Ireland to unlack value and support growth in
financial services
* Further franchising of directly managed branches to
position in discussions with Royal Mail (eg. better
customer interfaces, improved customer
‘management, flexible systems, and building credible
{alk-back options forthe end of the contract)
Continued restructuring of head office and overhead
costs, driven by redundancies, support services
restructuring and process redesign.
reduce and further variablise POL's network cost
base in ine with current strategy started in 2012
"1
UKGI00042805
UKG100042805
SECTION B: POL’s STRATEGY AND INVESTMENT PLANS
FINANCIAL SUMMARY OF POL’S PROPOSED STRATEGY
‘POL STRATEGY BASE CASE GROSS REVENUE PROFLE® (EM) (POL STRATEGY BASE CASE EBITDA PRORLE (EM!)
@®@OOG@Goe® ? a
20 2 16 7 in ”
(Original strategy forecast for 18/19 wat £28m EBITOAS. POL slighty oversehieved against
2O15/16A—-2016/17A_2OI7/BA_——OI/ABE 2019/20 2020/21F target, due to better than forecast malls and retall revenues, and government services
_— aiedeciicusy ittestelvenian revenues azo hoiding up better than forecast.
Gon. Services “Telephony mother
Growth in fnanca serves revenues requed to oft forcast drop In mals and
© sovernnent services reverses Operating costs required to fal by £80" to £7500 by
5020/21 (even from head offeeredundance, operating ffcencie and contnaed
* rs venues pe coos 2017/18 dete bit fal ssi ff franéing of recy managed branches)
ade RES etre dnd, frcost ob 4m in 2017/18
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UKGI00042805
UKG100042805
UK Government
Investments
SECTION B: POL’s STRATEGY AND INVESTMENT PLANS
OVERVIEW OF CORE AREAS OF INVESTMENT SPENDING
“Modernising IT Architecture — + Now supporting service comiract with ATOS and buy-out of conmacts wath Compatacenter to regain operational flexbilny and consral needed to detwer wider FT plans.
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= ‘ents cate onthe ho deer grove cata meso eer our ioe een, enone POs enn ses
+ Investment in eng Mods busines to ge RM that POL can deer ro tssenice (og online prevent 70: being
ote [passed by Rol Wai). Addonal mwessmentin cstomer focused intiaves such as new med and wacked products, beter elenng to SMEs (6
‘Sol Business Cb, andcallecions suppor: for large SW males) and customer daa cpu and ecognion stems
+ Develemen fa beter mre cuttomer cused and intgrated fnancalsences Busines withthe nunc of new preducs, ammo ffecive sales
Eo 2h; pala new pal stereo and wp sl seers rr oy
= +d sped forse cosmen erty Ser lm and in branch ome pablo rove gal tipo pho and cere, 0
wl consolidate PO's already leading position in this market and to open up the identity services offer co a wider range of public and private sector customers,
=e + seni gal andbrand iin alow FOLic calc adie cere data morte seu ares fs buses and to retaln
‘osars eg tough he cen olan)
{370m Tofund this investment programe ?O_has ben allocated up to €210m of imvesiven funding, with a maximum o 168m avaable spread over quarry
yor, 0. drawdouns}in 2018/19, and the remaining balance avalablen 2019/20 {again over quae drawdown). POL wl fund the remaining required spend rom is
280m oumrevources
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